This paper discussed and explained outsourcing, identified effective techniques and methods, and why outsourcing is utilized. Outsourcing can be an effective method for improving an organization’s functionality. While outsourcing advantages can reap benefits of improved productivity and lowered costs, the disadvantages must be taken in consideration to reach success. Analyzing the different aspects of: why is outsourcing necessary, what are the potential advantages and disadvantages, and is it cost effective upon a thorough review of the market and costs associated are essential.
Outsourcing a Source with Strategic and Effective Techniques
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The term is found initially with Coare in his paper published in 1937, entitled "The Nature of the Firm", and defined transaction costs as “ the cost of using the price mechanism" (Coase, 1988, p38). However, this is a rather ambiguous statement, and critics rightly claim that Coase failed to fully define the term (Barzel and Kochin, 1992). However, it does give some examples of the types of costly incorporates within this time, such as the cost of negotiating and closing contract. However, this is more useful than it may appear at first, as Chung (1969) uses approaching the analysis of shared tenancy, in order to provide contractual example of the Coase Theorem, which demonstrates the way in which a contract choice may be made will incorporate consideration of the transaction costs of the different contracts, even where the actual production costs remain the same. This instance there is an expansion into internal costs, and not the market costs (Chung, 1969). This work was also built on by Williamson.
Williamson differentiates between production and transaction costs by making analogies, the production costs of those equivalent of building and running the ideal production machine, in economic terms this may be seen as an efficient market, whereas transaction costs are those which are incurred as a result of departures from that perfection; such as market failure costs, as well as costs which are required in order to monitor and maintain contract. Therefore, transaction costs may be seen as incorporating a number of other elements, including the cost of acquiring, enforcing and transferring property rights, this is defined by Stavins (1995) as:
“General, transaction costs are ubiquitous in market economies and can arise from the transfer of any property right because parties to exchanges must find one another, communicate and exchange information. There may be a necessity to inspect and measure goods to be transferred, draw up contracts, consult with lawyers or other experts and transfer title. Depending upon who provides these services, transaction costs can take one of two forms, inputs or resources – including time - by a buyer and/or a seller or a margin between the buying and selling price of a commodity in a given market” (p.134).
This is the indication of what is meant by the term transaction costs, as well as broad way in which it may be interpreted and applied. From this, it is possible to apply the concept of transaction costs in very sadistic terms to the decision of whether or not to undertake outsourcing; there is the need not only to look at the actual production costs, but also the transaction costs to give a total cost. For example, a production costs may be much lower in an offshore location, but if managing the contract, enforcing the terms and then transporting goods may or increase the total cost above that of in-house production. Likewise, the opposite may occur, where the ability of the company to benefit from lower...